Unclassified STD/CSTAT/WPNA(2013)13 STD/CSTAT/WPNA(2013)13 Unclassified Organisation de Coopération et de Développement Économiques Organisation for Economic Co-operation and Development 09-Sep-2013 English - Or. English STATISTICS DIRECTORATE COMMITTEE ON STATISTICS Working Party on National Accounts THE TRADABLE SECTOR AND ITS RELEVANCE TO NEW ZEALAND S GDP To be held on 3-4 October 2013 OECD Conference Centre Beginning at 9:00 a.m. on the first day This document has been prepared by Jason Attewell Manager Balance of Payments) and Simon Crossan (National Accounts) - Statistics New Zealand and will be presented under item 6 of the draft agenda The complete document is only available in PDF format English - Or. English JT03344092 Complete document available on OLIS in its original format This document and any map included herein are without prejudice to the status of or sovereignty over any territory, to the delimitation of international frontiers and boundaries and to the name of any territory, city or area.
STD/CSTAT/WPNA(2013)13 2
The tradable sector and its relevance to New Zealand s GDP Paper presented at the New Zealand Association of Economists conference, at Wellington, New Zealand, 3 July 2013 Jason Attewell Manager, Balance of Payments, Statistics New Zealand Simon Crossan Statistical analyst, National Accounts, Statistics New Zealand P O Box 2922 Wellington, New Zealand info@stats.govt.nz www.stats.govt.nz
Crown copyright This work is licensed under the Creative Commons Attribution 3.0 New Zealand licence. You are free to copy, distribute, and adapt the work, as long as you attribute the work to Statistics NZ and abide by the other licence terms. Please note you may not use any departmental or governmental emblem, logo, or coat of arms in any way that infringes any provision of the Flags, Emblems, and Names Protection Act 1981. Use the wording 'Statistics New Zealand' in your attribution, not the Statistics NZ logo. Liability The opinions, findings, recommendations, and conclusions expressed in this paper are those of the authors. They do not represent those of Statistics New Zealand, which takes no responsibility for any omissions or errors in the information in this paper. Citation Crossan, S & Attewell, J (2013, July). The tradable sector and its relevance to New Zealand s GDP. Paper presented at the New Zealand Association of Economists Conference, Wellington, New Zealand.
Abstract This paper presents a definition of the tradable and non-tradable industries within the production measure of GDP. Previous work is built on using recently published input-output tables to determine which industries are tradable or non-tradable in terms of export orientation and import substitution. We produced chain-volume time series using these definitions. New Zealand is a small, open economy and as such there is interest in the relative performance of the tradable and the non-tradable sectors. The paper concludes that the stronger growth in the non-tradable sector has been driven by the increasing importance of the service industries to New Zealand. Introduction There has been growing interest in the tradable sector of the economy. That is, the sector of the economy that is subject to international competition. This interest is related to the effects of changes in the exchange rate, trade policy, international competitiveness, and the possible effects on the tradables sector. This paper investigates tradable and non-tradable industries in the context of gross domestic product (GDP). The paper puts forward a definition of what constitutes tradable and non-tradable industries within the production measure of GDP. As a small, open economy, New Zealand s economic growth is influenced by the global economy, both in terms of quantity of products and services available for consumption and the prices faced by producers and exporters. Identifying tradable and non-tradable components of GDP is a step towards understanding New Zealand s economic growth and where the influences of the global economy are felt most. Various unofficial tradable and non-tradable series that mix up GDP concepts are used in debate. The purpose of this work is to help inform the debate about tradable and non-tradable GDP and dispel some misconceptions about what growth in tradable and non-tradable industries actually reflects. The tradable sector can be fairly well identified with published information from the national accounts. The sector was approximately 20 percent of the New Zealand economy in 2010. It includes agriculture, forestry, and fishing; mining; and manufacturing. The tradable sector has grown at an average annual rate of 1.1 percent since the year ended March 2000. This compares with 2.8 percent average annual growth in the non-tradable sector and 2.4 percent average annual growth in GDP over the same period. The paper concludes that the growth in non-tradable GDP is driven by the increasing importance of the service industries to New Zealand, like other modern economies. Growth in non-tradable GDP is often mistaken for growth in government activity, but services are much broader than that. Tradable activity may be declining in terms of its contribution to GDP, but that does not mean that those industries are shrinking. It further concludes that in order to understand the drivers of relative growth, the answers can be explained with traditional industry classifications. Defining tradable and non-tradable industries What is tradable GDP? Tradable and non-tradable splits are much more easily applied to products than industries. There are existing definitions of tradable and non-tradable commodities in the consumers price index (CPI): tradables: goods and services that are imported or are in competition with foreign goods in domestic or foreign markets non-tradables: goods and services that face no foreign competition. 3
A Statistics NZ paper on tradable and non-tradable inflation in consumer prices (Dixon, Griffiths, & Lawson, 2004) noted: Dwyer defines export orientation as the extent to which total supply from a given industry is exported, and import substitution as the extent to which total usage of goods within a given industry are competing imports. The calculation is done by taking the value of imports or exports as a percentage of total supply or total use. By adapting the CPI definitions and applying them to GDP industries we get: tradable industries: industries where the majority of the output faces international competition non-tradable industries: industries where the majority of the output faces no international competition. An industry is classified as tradable based on how subject it is to international competition. Nontradable industries can still be subject to domestic competition. In practice, for the purposes of this paper, we have defined industries as tradable if: 10 percent or more of that industry s output is exported, and/or 20 percent or more of the supply to that industry are imported. In appendix IV, we include a table showing the sensitivity analysis when the threshold is set at 10, 20, 30, or 40 percent. In this paper we refer to the tradable sector and non-tradable sector although strictly speaking they are not sectors. By tradable sector we mean the group of industries that we have deemed to be tradable. Similarly, the non-tradable sector refers to the group of industries that we have classified as non-tradable. We have used the production approach to GDP to derive our tradable and non-tradable sectors. The production approach to GDP describes the value added of each industry to total GDP. Value added is the gross output of an industry (such as sales) less the intermediate consumption (goods and services used up during production). This approach avoids double counting, as the output of one industry can be the intermediate consumption in another. Methodology We used input-output tables for the year ended March 2007 and published in July 2012 to determine the exposure of each industry to international markets. These input-output tables can be used as a tool to describe the structure of the New Zealand economy at a specific period of time. They show the relationships between industries using the Australia New Zealand Standard Industry Classification 2006 (ANZSIC06), and the goods and services they use and produce using National Accounts 2006 Commodity Classification (NA06CC). Information from these tables about imports and exports of products were used to determine whether an industry is tradable or not. The values in the input-output tables are given in basic prices. This removes the effect of taxes from producers prices that are levied as tax payable per unit of output. Alcohol and tobacco excise duty are examples. This removes the upward bias of the tax if it were included in value added. 4
The United Nations (2008) gives the following overview: Basic prices + Taxes on products excluding invoiced VAT - Subsidies on products = Producers prices The basic prices in the input-output tables are current prices rather than volumes. Current prices are useful as the structure of the economy at a point in time can be estimated. For example, current prices are used as the weights when compiling chain-volume series. Export industries We determined which industries face significant international competition based on their exports relative to total output. If an industry s exports are greater than or equal to 10 percent of total output, we deemed the industry to be tradable. This was done using the exports by product data. An export proportion (T p ) was calculated for each product as the value of exports for each product (E p ) divided by the value of total output of each product (O p ). T p = E p /O p We assumed the export proportion of each product to be the same for each industry. This is the same method used to produce the inter-industry transactions table in the input-output tables. These export proportions (T p ) were applied to the value of output of each product by industry (O pi ). The resulting export values were summed by industry for all products. This is the estimate of the value of exported goods and services by industry (E i ). E i = T p. O pi Industries were considered to be exporting industries if their proportion of exports (P i ) to total output (O i ) was equal to or greater than 10 percent. This is consistent with previous methodologies and produces an industry split that would typically be viewed as export industries. P i = E i / O i Import competing industries We used a similar method for import competing industries. The product supply table was used to determine the proportion (B p ) of each product that was imported (I p ) relative to the total output (O p ). B p = I p / O p These product import proportions (B p ) were applied to the value of output of each product by industry (O pi ). The sum of these values (B p. O pi ) is the estimate of the total amount of import competition each industry could face. I i = (B p. O pi ) 5
If the value of imports that each industry faces (I i ) was equal to or greater than 20 percent of an industries total output (O i ), we considered that industry an import competing industry. P i = I i / O i Tradable GDP Industries had to satisfy at least one of the two criteria as either exported-oriented or importcompeting to be considered tradable. We made a manual adjustment to agriculture, as much of the output from this industry is not exported as is, but goes through other industries and is then exported. Such a large proportion of output of this industry is eventually exported, (nearly 70 percent) that it was included in the tradable series so the split was more meaningful. This analysis was done on the 106 industries in the input-output tables. The results were compiled at New Zealand Standard Industry Output Categories (NZSIOC) level 1 based on ANZSIC06 industry classifications. These are the 16 industries that are published as part of the quarterly GDP release. These industries had to have most of their sub-industries to meet the above criteria to be included as tradable. Industries typically have some tradable sub-industries, however the overall industry needed to face international pressures to be considered tradable. We refer to this methodology as the direct method for classifying tradable GDP. Agriculture: tradable or not tradable? One of the most significant outputs from the agriculture industry in New Zealand is milk solids. If we followed the strictest definition of tradable and non-tradable in this case, the agriculture industry as a whole would be classified as non-tradable. Why? Because in the case of dairy, the output of the industry is raw milk, and this needs to be processed. The raw milk becomes an input to the manufacturing industry, but as it changes hands, it is not subject to any international competition. Meat manufacturing is similar - sheep and beef slaughters are included as agriculture production, but they are processed in a meat plant before the final products are exported. The value added approach to GDP is designed to avoid double counting. The value added of an industry is the output of that industry less the intermediate consumption (the goods and services used up in the production process). So the value added of the dairy manufacturing excludes the raw milk purchased from the agriculture industry. And as the raw milk is not subject to international competition, only the finished dairy products (butter, cheese, milk powder, and casein) should be included in our definition of tradable GDP. However, we make an exception for the agriculture industry, and apply the indirect principle to it. While the output of the agriculture in the strictest sense is not generally facing international competition, the products manufactured using those inputs definitely are. For example global prices for dairy products have a direct impact on what farmers are paid for their milk. As illustrated in table 5 of this paper, the agriculture, forestry, and fishing industry has the highest percentage (69 percent) of output exported according to ultimate disposition. Classifying industries at ANZSIC division level (NZSIOC level 1) The input-output tables allow analysis of the openness of industries to be assessed at a relatively low classification level. However, these tables are only available in current prices. Chain-volume GDP data is not available at such low levels. The chain-volume GDP series are predominantly used for quarterly indicators of economic activity, where timeliness is critical, and therefore more detailed data is often not available. In this paper we classify industries as tradable or non-tradable based on the predominance of the sub-industries that make it up. The rationale for this decision is based on the trade-off between accuracy and comparability with other statistics. For chain-volume GDP, data below NZSIOC 6
level 2 is not available for design, quality, or data reasons. (See appendix III for the NZSIOC level 2 industry breakdown.) While for some industries there is clearly a mix of tradable and nontradable elements within it, it is not practical to separate these out for chain-volume analysis. For the purposes of this paper, we have decided that it is worth the trade-off of accuracy to have comparability with published statistics. For example, classifying at division level allows easy comparisons with labour measures so that labour productivity measures can be derived. This is similar to the Dwyer approach (1992): In practice the split between the tradable and non-tradable sector should be in terms of commodities which are the most basic units of analysis. However, in practice where the required I-O data are only available by industry and the purpose of the project is to analyse prices, productivity, investment, employment and other resource allocations, and industry based classification was deemed appropriate. An alternative method would be to split chain-volume industries into their tradable and nontradable elements using current price proportions, and apply these to the volume indicators. This method could give a false sense of accuracy, given that the quarterly indicators are not designed for this purpose. Results: using the direct methodology Using the direct method for classifying tradable GDP, as described in the methodology section, results in the following split (shown in table 1) at NZSIOC level 1. The level 4 breakdown is given in appendix IV. Table 1 Tradable / non-tradable split using the direct methodology Tradable GDP Agriculture, forestry, and fishing Mining Manufacturing Source: Statistics New Zealand Non-tradable GDP Electricity, gas, water, and waste services Construction Wholesale trade Retail trade and accommodation Transport, postal, and warehousing Information media and telecommunications Financial and insurance services Rental, hiring, and real estate services Professional, scientific, technical, administrative, and support services Public administration and safety Education and training Health care and social assistance Arts, recreation, and other services We aggregated these value-added time series via chain-linking using current price weights. This produced tradable and non-tradable time series in actual chain-volume terms expressed in 1995/96 prices. The annually updated chaining weights allow for the change in the relative size of each industry in the economy over time. The chain-volume series were seasonally adjusted to produce quarterly chain-volume seasonally adjusted series. 7
For the year ended March 2007 the tradable industries contributed 20 percent to total GDP in current prices. The tradable sector has slowly declined as a proportion of GDP from about 29 percent at the beginning of the series (in 1987), to about 20 percent in 2010. Figure 1 The quarterly chain-volume series has a turning point in 2009 where the tradable sector begins to grow faster than the non-tradable sector (see figure 2). This reverses the trend seen particularly in the 2000s, where the gap between the relative proportions was becoming larger. The March 1996=100 base indexes of the two series in figure 2 illustrate the relative divergence of the tradable and non-tradable sector over the past 17 years. The outward-focused tradable sector suffers to a greater extent during recessions. This is especially true for recessions that occur as a result of a deterioration of international economic conditions. For example the tradable series has noticeable declines during the Asian financial crisis of 1997, the NASDAQ collapse in 2000 and the global financial crisis of 2008. The non-tradable series was not affected to the same extent. 8
Figure 2 This method measures the extent to which industries face international pressures in a direct sense. That is, industries that export products that face international competition or industries that compete with imported products. It therefore does not include any industries that are adding value at earlier stages of production. For example, agriculture and manufacturing are heavy users of electricity, and this contributes a significant proportion of their intermediate consumption. However the electricity generation and electricity transmission and distribution industries are not included in the tradable sector because electricity is not directly exported. Industries in the tradable sector will source inputs from other domestic industries that are not included in the tradable sector. These industries, while not directly facing international competition, do face it indirectly as their output is included as part of the value of exported products. In an attempt to measure this broader view of international competition, an alternative indirect method was also developed. Using an indirect methodology to calculate the tradable nontradable split New Zealand s small, open economy means changes in the international economic environment affect the whole economy, not just those industries directly exposed to international competition. The proportion of indirect exposure can be estimated using the ultimate disposition table from the series of input-output tables. The ultimate disposition table estimates the proportion of the output of each industry that is ultimately exported. This includes both direct exports and exports that go through a transformation process or multiple transformations before they are exported. Using this method and retaining the same selection criteria, only four industries at NZSOIC level 1 remain in the non-tradable sector. 9
Table 2 Tradable non-tradable split using the indirect methodology Tradable GDP Agriculture, forestry and fishing Mining Manufacturing Electricity, gas, water and waste services Wholesale trade Retail trade and accommodation Transport, postal and warehousing Information, media and telecommunications Financial and insurance services Professional, scientific, technical, administrative and support services Education and training Arts, recreation, and other services Source: Statistics New Zealand Non-tradable GDP Construction Rental, hiring and real estate services Public administration and safety Health care and social assistance The indirect methodology required a more strict set of criteria with higher thresholds to make the industry split useful. We selected a higher proportion of output exported to produce an industry split reflective of those industries typically regarded as facing a significant amount of international competition. Industries had to have a majority of their sub-industries with an export proportion of over 25 percent to be considered tradable. Using this modified indirect measure, the tradable/non-tradable industry split is considerably different. The tradable sector made up 41 percent of the economy in 2010, compared with 20 percent when using the direct methodology. Table 3 Tradable/non-tradable split using the modified indirect methodology Tradable GDP Agriculture, forestry and fishing Mining Manufacturing Wholesale trade Transport, postal and warehousing Information, media and telecommunications Professional, scientific, technical, administrative and support services Source: Statistics New Zealand Non-tradable GDP Electricity, gas, water and waste services Construction Retail trade and accommodation Financial and insurance services Rental, hiring and real estate services Public administration and safety Education and training Health care and social assistance Arts, recreation, and other services 10
We chained the industries together using the current price annual weights as in the previous method. We then put the aggregated series through seasonal adjustment. This produced quarterly tradable and non-tradable chain-volume seasonally adjusted value-added series. Figure 3 illustrates the growth of the tradable and non-tradable series using the modified indirect methodology. With this method, the growth in the tradable sector matches that of the nontradable sector up to 2005. The divergence is also greatly reduced between the two series and the post-2008/09- recession recovery in the tradable sector is stronger. Figure 3 Figure 4 illustrates the difference between the two methods. The main difference is the stronger growth of the tradable sector and the slightly slower growth of the non-tradable sector using the indirect method. Growth rates using either method have been similar in recent years. Figure 4 11
Table 4 shows that during most of the 2000s, there was divergence between the tradable and non-tradable series using either method. However, since 2008, the growth rate for the two nontradable series has slowed considerably. Over the past couple of years the growth in the two tradable series has increased. The changes in the growth rates of these series mean that they have been growing at approximately the same rate over the past four years. Table 4 Growth patterns in the tradable and non-tradable GDP series Annualised growth (%) Direct Indirect Tradable Non-tradable Tradable Non-tradable 2000 08 1.1 2.8 2.0 2.7 2009 12 0.3 0.3 0.3 0.2 Source: Statistics New Zealand Inter-temporal analysis For this analysis we used the new input-output tables, for the March 2007 year. Previous analyses were completed using tables from March 1996. Although the time period between these is significant, there were no significant changes between the products bought from and sold to each industry to make a difference to the tradable sector. Therefore, the split that was used for previous analysis is the same as the current industry split. This is not surprising as the products produced by the industries that make up the tradable sector and the industries that use of these products are fairly consistent over time. Figure 5 shows the previous tradable series produced from the older input-output tables and under the older Australia New Zealand Standard Industry Classification 1996 (ANZSIC96). This series is a sum of the tradable industries agriculture, forestry, and fishing; mining; and manufacturing. The differences between the two series are the changes to the industry classifications under ANZSIC06 (Statistics New Zealand, 2012b), the improvement of some industry methodologies, the updating of seasonal adjustment, and the effect of chain-linking (see Statistics NZ, 2013, for more information). 12
Figure 5 Discussion The industry split using the direct method results in a tradable sector which makes up about 20 percent of the economy for the year ended March 2010. This has slowly reduced over time, as the tradable sector has grown at a slower pace than the non-tradable sector. The divergence between the growth rates of the two series occurs mostly in the ten-year period from 1997 to 2007. The tradable sector is composed of fewer industries and those industries are heavily exposed to shocks. As a result the tradable sector time series is more volatile than the non-tradable sector. Careful interpretation is needed when looking at specific periods of time. In the quarterly time series, the peak in manufacturing value added was in September 2005. After this point, manufacturing declines to levels seen in 2002. Manufacturing is the largest component of the tradable sector at about 70 percent. Therefore the divergence between the tradable and non-tradable sectors increases from 2005, with the declining growth in manufacturing being the main driver. Figure 6 illustrates how the growth in the tradable sector closely reflects the growth in the manufacturing value added series. The divergence in the past couple of years is due to the increasing influence of agriculture, forestry, and fishing, and mining industries. 13
Figure 6 Summary Table 5 describes the international exposure of NZSIOC level 1 industries for the March 2007 year in current prices. The industries that exported the greatest proportion of their output were agriculture, forestry, and fishing; manufacturing; and transport, postal, and warehousing. The industries that faced the greatest proportion of imports as a proportion of total supply were manufacturing; transport, postal, and warehousing; and mining. Overall, in current prices exports were 28.6 percent of GDP for the year ended March 2007. In the year ended March 2012, exports were 30.3 percent of GDP. 14
Table 5 Exports and imports as a proportion of total output Year ended March 2007 NZ$ (millions) Industry Percentage of GDP Percentage of output exported (1) Percentage of imported supply Agriculture, forestry, and fishing 6.4 69.8 2.4 Mining 0.8 43.1 13.2 Manufacturing 12.6 51.4 20.7 Electricity, gas, w ater, and w aste services 2.2 21.2 0.2 Construction 4.6 5.4 1.1 Wholesale trade 5.6 29.9 7.1 Retail trade and accommodation 6.7 15.8 4.6 Transport, postal, and w arehousing 5.1 41.3 8.8 Information media and telecommunications 6.0 23.2 7.1 Financial and insurance services 4.9 23.1 3.2 Rental, hiring, and real estate services 12.4 6.9 1.4 Prof, scientific, technical, admin, and support 8.1 26.9 6.2 Public administration and safety 4.2 3.9 0.9 Education and training 3.2 11.9 2.2 Health care and social assistance 5.4 1.4 0.5 Arts, recreation, and other services 3.0 15.9 4.0 Gross domestic product (2) 100.0 28.9 5.9 1. This is the proportion of output exported as per the ultimate disposition table 2. Includes unallocated taxes on production and imports. Australia and New Zealand tradable and non-tradable sectors In 1996 the Australian Bureau of Statistics (ABS) produced an experimental tradable series using a method similar to our direct method. The industry split was also similar. Their series ranges from 1974 to 1990. The ABS made the split at a lower level and the proportion of total industry included in the tradable sector is given in parentheses in table 6. Table 6 The tradable and non-tradable sectors for Australia and New Zealand Tradable GDP New Zealand Australia Agriculture, forestry and fishing Agriculture, forestry and fishing (89%) Mining Mining (89%) Manufacturing Manufacturing (92%) Transport Other services (6.7%) Source: Statistics New Zealand Notable differences are that the ABS have included some services as tradable and have excluded parts of agriculture, forestry, and fishing; mining; and manufacturing. Although their 15
analysis makes the split at a lower level, the final size of the tradable sector and the growth rates are similar. The main conclusions are also similar. For example the ABS notes that the manufacturing industry dominates the tradable sector and that the tradable sector declines as a percentage of GDP over their time series. The relative size of the tradable sector in each country was also similar at 25.8 percent of Australia s GDP in 1990, and 25.0 percent of New Zealand s GDP in the same year. The global financial crisis and the 2008/09 recession The global financial crisis and the recession of 2008/09 had a large effect on the tradable sector. In quarterly chain-volume seasonally adjusted terms, the December 2007 to June 2009 peak-totrough fall was 5.7 percent. The non-tradable sector s decline was relatively smaller, at 1.8 percent. Table 7 2008/09 economic recession and recovery December 2007 to June 2009 Tradable sector Non-tradable sector % % Peak-to-trough percent fall 5.7 1.8 Post-recession recovery 11.6 8.0 Growth above December 2007 5.2 6.1 The tradable sector faces variable conditions, including changes in commodity prices. The commodity price index fell sharply in the latter part of the recession, but rebounded strongly in 2010 and 2011. The NZD/USD exchange rate was also volatile through 2008 and 2009. The general trend in commodity prices has also been positive, with an average annual growth of 3.7 percent since March 2000. The tradable sector has recovered from the recession, and in December 2012 surpassed the highest level from September 2007 by 4.7 percent. The non-tradable sector The non-tradable sector is made up predominately of service industries. This sector has been growing at a faster rate than the non-tradable sector and as a result there has been a shift in the relative importance of each sector with regards to GDP. This shift away from goods production and into services is a common phenomenon in advanced economies as they move towards activities that add more value. 16
Figure 7 Non-market services public administration, health, and education The growth in public administration and safety, health care and social assistance, and education and training value added has been typical of growth in the non-tradable sector. These three industries combined have grown from 13.6 to 16.6 percent of the economy from 2000 to 2010, with much of that growth occurring after 2003. This indicates that there has been a slightly higher growth in these services relative to the entire economy in the past 10 years. Figure 8 shows growth in these primarily non-market (there is a market component) industries relative to non-tradable GDP. The March 1996 base index shows that growth in non-market services has generally been lower. The 2008/09 recession caused negative growth in the nontradable sector, and an increase in public administration, health, and education activity from 2006 has reduced the difference in overall growth rates from the year ended March 1996 to virtually zero. 17
Figure 8 Since the 2008/09 recession, however, growth in general government has been muted, growing at an annualised rate of 1.9 percent since the year ended March 2008. This compares with 3.7 percent annualised growth from 2000 to 2008. Health care and education are more recession proof as their growth rates are not significantly different before or after the recession. Furthermore, in 2010 the public administration, health, and education industries were only 16.6 percent of the economy, and made up only 21.1 percent of the non-tradable sector. Therefore the relative stability in the rate of growth of these series means that total non-tradables is not heavily influenced by these service industries that are primarily non-market. Market services Professional, scientific, technical, administration, and support services Professional services generally grow at a faster rate than other industries in western economies. In New Zealand, professional services have grown at an average annual rate of 2.9 percent since 2000. In comparison, total GDP has grown at an average rate of 2.4 percent annually. 18
Figure 9 Industries of particular interest For many of the industries in the New Zealand economy, it is relatively straightforward whether they are tradable or non-tradable. The most obvious examples are the manufacturing industry, because the output produced is subject to international competition, and public administration and defence, where the output clearly isn t subject to international competition. Some other industries are not quite as straightforward as the examples above, so we will discuss these in more detail and explain the rationale for classifying them as either tradable or nontradable. Information media and telecommunications Information media and telecommunications comprises mostly what used to be communications under the previous industry classification (ANZSIC96). One of the major changes in this industry from the previous classification is that postal services has moved to transportation, postal, and warehousing. This classification now comprises: publishing (except Internet and music publishing) motion picture and sound recording activities broadcasting (except Internet) Internet publishing and broadcasting telecommunications services Internet service providers, web search portals, and data processing services library and other information services. Telecommunication services is the largest contributor to value added in this industry. On the face of it, it may seem that telecommunications is subject to international price pressures. Fastchanging technology means that the price of telecommunications effectively falls as you get more for the same price. For example, the number of gigabytes used, the amount of data in plans, and the speed of the connection has consistently increased while the actual price paid has been relatively stable. While the pace of technological change is important, to supply telecommunications services such as line rental or cellular phone services, a large amount of domestic fixed capital investment is 19
needed which is currently not subject to any foreign competition. Therefore these parts of telecommunications are likely to remain as non-tradable industries. Retail trade and accommodation In the input-output tables, the retail trade and accommodation industry has a relatively high proportion of exports (12 percent). At NZSIOC level 2, it is observed that most of these exports of services originate from the accommodation and food services sub-industries. The retail trade component is much larger than the accommodation component, and since the retail component has a very small proportion of exports the industry does not meet the criteria to qualify as a tradable industry The accommodation sub-industry has a significant proportion of exports because of how visitors to New Zealand are treated in the macroeconomic accounts. In the balance of payments and national accounts, foreign visitors to New Zealand are treated as non-residents, and therefore anything they purchase is treated as an export. The purchaser has to be physically present in the country for New Zealand to export it. This is known as mode 2 of supply. This is how accommodation services in particular can be shown to have exports. We do not actually export hotels, but the service they provide becomes an export when purchased by a visitor to New Zealand. Since the purchaser has to be physically present, the goods and services are not subject to international competition. It is true that New Zealand as a tourist destination is subject to international competition someone may decide to visit Australia instead if they see it as better value for money but once a visitor is actually here, the prices for accommodation, meals, souvenirs, and such are subject only to domestic competition. For this reason, it could be argued that accommodation services are not truly tradable, even if they export a large proportion of their output. Figure 10 shows the relative strength in the growth of retail and accommodation relative to the entire economy over the past 12 years. Figure 10 20
Electricity, gas, water, and waste services Electricity generation is the largest component of this industry. It is driven by demand for electricity. There is an argument to apply the indirect principle to the electricity industry because New Zealand manufacturers are large consumers of electricity, and their output is subject to global competition. For example the metal product manufacturing industry consumes a relatively large proportion of domestically produced electricity. Therefore indirectly, global competition can affect the national demand for electricity. For the year ended March 2007 the electricity, gas, water, and waste industry indirectly exported 21 percent of their output. Because this level is relatively low, we have decided not to apply the indirect principle to the electricity, gas, water, and waste industry. Financial and insurance services The financial and insurance service industry is also subject to foreign pressures, and therefore arguably tradable. The industry sources much of their funding from abroad. However, the method uses the degree to which the industries output is subject to international competition. There are not significant imports or exports of financial and insurance services. Education and training Education and training has a tradable element in foreign fee-paying students. Foreign students studying in New Zealand are treated as a subset of travel exports, regardless of how long they stay. Like retail and accommodation exports, exports of education services to foreign fee-paying students is mostly mode 2 supply (consumption abroad) of services. The students are generally present in New Zealand, although this could change with courses being offered via the Internet. Education and training is not included in tradable GDP simply because of the small number of foreign fee-paying students compared with overall student numbers. Transport, postal, and warehousing Transport and supporting services do face some international competition. For example nonresident shipping companies and international air freight services are highly competitive industries. This industry also includes sub-industries that rely on local infrastructure and are therefore not as exposed to international competition, for instance, road transport; postal, courier and delivery services; and warehousing and storage services. Currently the sub-industries that are non-tradable make up a greater share of the total industry, so at NZSIOC level 1 the industry is considered non-tradable. Construction The construction industry, while not in the tradable sector, is exposed to international influence. For example, the domestic demand for housing or commercial buildings is influenced by global credit conditions and the value of the New Zealand dollar. Figure 11 shows the level of construction value added and the trade weighted index. 21
Figure 11 Exports of services Exports of services are included in some models of tradable and non-tradable GDP. In this paper, we focus on the value added of industries also known as the production measure of GDP. Exports of services are a category in the expenditure measure of GDP, which is a different approach to measuring GDP based on the final use of goods and services produced in an economy. With the approach that we have taken to categorise an industry as either tradable or nontradable based on how subject to foreign competition it is most service industries are unlikely to be classified as tradable. For most service industries, the level of exports is a much smaller proportion than what is consumed domestically. This is why some models include exports of services in their measures of tradable GDP, noting that this is mixing different conceptual measures of GDP. Conclusions Tradable distinction interesting but industries matter This paper highlights that no matter what method you use to construct tradable and non-tradable GDP, it is the industry data underneath that explains what is going on. In the absence of industry data explanations the debate of tradable and non-tradable GDP becomes too simplistic. The industry dimension is crucial to explaining the movements over time in tradable and nontradable GDP. Moreover, it is important not to ascribe value judgements to what the size of particular sectors of the economy should be. For example, a common misconception is that non-tradable GDP industries are not productive, and in some cases it is argued that increased non-tradable GDP reflects a burgeoning government sector. In fact, the public administration and defence, health care and social assistance, and education and training industries made up just 16.6 percent of the economy in 2010. These industries do not greatly influence the growth of non-tradable GDP because of their relatively small size and because their growth is similar that of non-tradable GDP over the long term. The growth in nontradable industries is primarily driven by the market services industries. 22
Non-tradable industries can still face market competition the key point is that they don t face international competition directly. The nature of services industries means that currently a much higher proportion of the output of these industries are consumed domestically rather than exported. A growing services sector and declining manufacturing is common The data shows that the growth of the services industries is contributing to the growing gap between tradable and non-tradable proportions of GDP. And this phenomenon is totally consistent with a modern economy that has an increasing share of services. An IMF working paper on the declining importance of tradable goods manufacturing (Hunt, 2009) reiterates that a declining manufacturing sector and increasing services sector is expected in a modern economy: A common feature of economic development is the evolving composition of production. Early in the development process, the share of agricultural output in GDP declines and the share of manufactured goods increases (industrialization). Once economies reach a certain level of wealth, the share of goods production in GDP starts to decline and the share of services increases (deindustrialization). Is the tradable / non-tradable distinction really relevant? It is well known that New Zealand is a small and open economy and as such is vulnerable to external shocks. The distinction between whether an industry is tradable or non-tradable is essentially subjective. In our analysis, we included the value added of agriculture, but could have included financial and insurance services, or information media and telecommunications. The subjective nature of classification, along with the lack of an international definition means the results can be interpreted in a variety of ways. Therefore it would be more objective and more insightful to analyse the performance of industries relative to each other, rather than the performance of an arbitrary tradable non-tradable GDP split. Another key point that this paper has highlighted, is that if you include all the indirectly tradable industries their output becomes intermediate consumption for a tradable industry you would include nearly the entire New Zealand economy. This result merely reiterates that New Zealand is a small, open economy, and in a sense, the whole economy is tradable. Publishing tradable and non-tradable GDP as a regular output Based on the results of this paper, it is possible for Statistics NZ to publish regular tradable and non-tradable GDP series if there is demand from users. The advantage of Statistics NZ producing an official series of tradable and non-tradable GDP is that policy makers can focus on informed decision making and debate instead of producing data. It makes sense for Statistics NZ to produce this data along with the regular GDP releases to take advantage of existing systems, knowledge, and processes. An example of this kind of benefit is the application of chain-linking to the series. The results published in this paper represent the first time that such a series has been chain-linked, which means that the relative weights of each industry are updated annually. Further improvements to the tradable and non-tradable GDP series can be introduced as other improvements are implemented in the national accounts. Future developments The analysis in this paper was not extended to productivity comparisons between the tradable and non-tradable sectors, but because of industry allocation approach we used this could easily be done. Statistics NZ produces productivity measures by industry. As with value added, it is the industry dimension that would be used to explain any differences in the productivity performance of the tradable and non-tradable sectors. 23
Statistics NZ is currently researching the feasibility of doing supply and-use balancing with volume series. Supply-and-use in both current prices and in volumes requires a significant amount of data to be done properly (both for values and prices) but has the advantage of allowing lower level analysis of volume series. A project to create a prototype for this is currently underway. If formally adopted in the future, it will enable lower-level volume series for GDP. If this becomes available in the future, the tradable and non-tradable split used in this paper will be revisited. References Dwyer, J (1992). The tradable non-tradable dichotomy: A practical approach. Australian Economic Papers, 31(59), 443 459. Dixon, H, Griffiths, D, Lawson, L (2004). Exploring tradable and non-tradable inflation in consumer prices (New Zealand Association of Economists conference paper). Available from www.stats.govt.nz. Hunt, B (2009). The declining importance of tradable goods manufacturing in Australia and New Zealand: How much can growth theory explain? (IMF Working Paper No 90/16(200), 1 15). Available from www.imf.org. Knight, G, & Johnson, L. (1997). Tradables developing outputs and price measures for Australia s tradable and non-tradable sectors (Working Paper No 97/1, ABS Catalogue No. 1351.0). Available from www.abs.gov.au. Officer, LH, & Goldstein, M (1979). New measures of prices and productivity for tradable and nontradable goods. The Review of Income and Wealth, 25(4), 413 427. Organisation for Economic Co-operation and Development (2013a). OECD/WTO trade in value added: (TiVA) concepts, methodologies and challenges. Available from www.oecd.org. Organisation for Economic Cooperation and Development (2013b). OECD/WTO trade in value added (TIVA) indicators (PDF, 150 kb). Available from www.oecd.org. Statistics New Zealand (2012a). National Accounts input-output tables: year ended March 2007. Available from www.stats.govt.nz. Statistics New Zealand (2012b). Gross Domestic Product: December 2011 quarter (new industry classification). Available from www.stats.govt.nz. Statistics New Zealand (2013). Quarterly gross domestic product: Sources and methods (third edition). Available from www.stats.govt.nz. Treasury (2012). Special Topic: Tradable sector in New Zealand. Monthly Economic Indicators, April 2012. Available from http://www.treasury.govt.nz. United Nations (2008). System of National Accounts 2008. Available from http:// unstats.un.org. 24
Appendix I input-output tables This analysis of the tradables and non-tradables sector draws on the information in the inputoutput tables produced by the national accounts. The latest tables were released in July 2012 and were for the year ended March 2007. These tables are the first to be published under the new ANZSIC06 industry and NA06CC product classifications. These new classifications better reflect the modern New Zealand economy. Input-output tables describe the structure of an economy. Specifically, they show the relationship between industries, the goods and services the industries produce, and which industries use these goods and services. Input-output tables are a useful analytical tool, as their uses include: estimating the effect of changes in one industry on key economic variables estimating the impact of a change in the export sector on the total economy exploring the reliance of industries on imports, and estimating their contribution to exports. These input-output tables cover 106 industries and 205 products. This analysis utilized the supply-and-use tables. The supply table describes the supply of products into the economy including both domestic production and imports. The use table describes how these products are used, including both domestic consumption and exports. The products in these two tables are reconciled in the supply-use framework so that total supply equals total use. The supply-and-use tables are used to determine the relative exposure to international competition. This is determined either through the proportion of products produced in an industry that are exported or the proportion of products produced by an industry that face competition via imports. Industries that face international competition, either via import substitution and/or export competition over a certain threshold, are included as a tradable industry. Industries that do not meet either of the categories are considered non-tradable industries. The ultimate disposition table is used to measure the direct and the indirect exposure to export competition. This table allows users to calculate the proportion of each product that is ultimately exported. As this method includes indirectly exported products, the industries included in the tradable sector are different. For example, raw milk is not exported, but milk powder, butter, and cheese are. Under the ultimate disposition table, the raw milk used in the manufacturing process which produces these exported products is included in exports. 25